Bernie Madoff Ponzi Scheme
BiographiesFinancial News

Madoff, “Hmm.. let’s report 36.2% gains “

Bernie Madoff

“I really think very highly of him, people make mistakes,” wrote a Madoff confidant and NYSE broker. At a party over the weekend I met a nice girl from Boston University, and I forgot to ask for her number when I left. THAT was a mistake.

Bernard Madoff, former chairmain of the board at the NASDAQ stock exchange stealing $50 billion through a Ponzi scheme is no mistake. The losses stem from a deliberate and deceitful crime of a magnitude only rivaled by Ken Lay and his chefs that cooked Enron’s books in 2001. The day before his arrest, Madoff told his sons that his investment firm “is all just one big lie.” And with great deciet, comes a captivating storyline including big name victims, a surfacing video of Madoff claiming an “impenetrable regulatory system”, a decieving investment strategy, and another SEC failure.

Mr. Madoff initially used his Wall Street reputation as a former chairmain of the NASDAQ board to recruit early investors at the finest country clubs around the country. He then created fictional returns that attracted more investors….investors who would eventually tell their friends, “I’ve got my money invested with Madoff and he’s doing really well. You can’t get in unless you’re invited…but I can probably get you in.”

Whenever a firm or individual requested money, Madoff would pay them with principal from other investors. Even though Madoff claimed gains throughout this 2008 financial crisis, many of his clients asked to withdraw their stock investments, until the withdrawls got overwhelming and he wasn’t getting new investors to furnish the old.

Blockbuster Names Go Bust With Madoff Securities

Among the big names with considerable investments in Madoff Securities were international banks, hedge funds, and wealthy private investors; some of whom invested 50-95% of their assets. New York Mets owner Fred Wilpon invested tens of millions of dollars of both his and the Mets organization’s money with Madoff. Other notables include Steven Spielberg’s charity, real estate magnate Mort Zuckerman, the Elie Wiesel Foundation for Humanity (Why couldn’t Madoff just say no to charities? Does he have no heart?) and Norman Braman, the former owner of the Philadelphia Eagles. Investment firms taking the biggest losses include Spain’s Gruopo Santander, France’s BNP Paribas, and Fairfield Greenwich Advisors.

Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff’s clients. “Every big divorce that came through my office had portfolio positions with Madoff,” he says.

Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he’d take down half the world with him.

WSJ.com: Fund Fraud Hits Big Names, December 13, 2008

Watch A Video of Bernard Madoff Lying Through His Teeth

Mr. Madoff’s words to his sons “it’s all just one big lie,” is definitely not an understatement..


Madoff’s Proposed Investment Strategy

Older, Jewish investors called Mr. Madoff ” ‘the Jewish bond,’ ” says Ken Phillips, head of a Boulder, Colo., investment firm. “It paid 8% to 12%, every year, no matter what.” Mr. Madoff explained his smooth returns by claiming that he bought baskets of stocks, and in case the market crashed he placed put-options. Hedging with options is a pretty damn common practice, but it never delivers small gains for dozens of consecutive quarters of changing market environments the way Madoff’s fund did.

“He was a low-key guy,” said Ms. Manzke of Maxam Capital Management, “he would say, ‘Look, I’m a market-maker, and I don’t want anyone to know I’m running money.’ It was always for select people. He was always closed, he wasn’t taking new money.”

The SEC Is Inept

I’m going to go on a limb and assume that no one at the SEC has heard of Frankie Valli or his hit lyrics, “you’re just too good to be true, can’t take my eyes off of you.” Clearly Madoff’s 1% monthly gains every month should have set off flags – either he was cheating the market or he was cheating his clients.

“Madoff Securities is the world’s largest Ponzi Scheme,” Mr. Markopolos, wrote in a letter to the U.S. Securities and Exchange Commission in 1999.” Markopolos was one of many members of the investment community baffled by Madoff’s returns, see: “Madoff tops charts, skeptics ask how” from a 2001 hedge fund magazine.

The SEC investigated Madoff Securities when they last filed in 2006 and the commission didn’t find any reason to further their investigation.

I thought the SEC was asleep at the wheel when it missed a decade of banks overleveraging and designing fantasy CDOs, but I’m getting the feeling they’ve been wide awake, just inept.

Conclusion

I need your help, I can’t remember the phrase… something about “good” and “true”? No one beats the stock market, not even Madoff the “market maker.” For every trade their is a buyer and a seller; both of whom might be the most “sophisticated” of investors, but only one will have made the right decision a year from now. Thousands of speculative investors may be early buyers into the next hot industry, but its doubtful they will be correct for years in a row. There is no game if someone always wins.

Sources:

Verizon Stock Dividend
High Dividend StocksStock Tips

Verizon – Stocks That Can Defend High Dividends

In October, Verizon Communications (VZ) raised their quarterly dividend 7% to $.46 a share from $.43 cents, with a dividend yield at today’s price now 5.67%. Verizon should be able to defend its dividend in the next 12 months. The communications company is estimated to grow EPS 4% in the next four quarters, a slower rate than 2008’s 8%, but enough to cover the current dividend. The expected dividend payout ratio for 2009 is 69% percent of earnings, which is comfortably nested between the payout ratios from 2007 – 70% and 2008 – 67%. However, at today’s market price the company appears to be trading at a premium.

Verizon In The Bear Market

Two aspects of Verizon that I believe really help them in the current market conditions are their contract agreements and bundled services. The majority of Verizon Wireless customers are locked into a 2 year contract, with a steep termination fee of a couple hundred dollars, which will help retain customers through this recession. Secondly, Verizon has created a value bundle of their home product line that includes FIOS high speed internet, digital TV, and phone lines. Revenue for their bundled packages was up 45% year-over-year in the 3rd quarter reported in October. When families consider cutting their bills in these hard times, the Verizon package has strengthened its attraction.

Company Strengths

“Can you hear me now?” Verizon spent $2.5 billion on its successful advertising campaign in 2007, continuing to grow its already powerful brand name. 

Verizon has two product and service segments – wireline and domestic wireless that serve businesses and consumers.

The wireline segment was 54% of revenue in 2007 with sales of $50 billion and an above industry average 27.3% EBITDA profit margin. Wireline consists of voice, VOIP, internet access, and digital television. The segment has 41 million lines in 150 countries, with 85% of revenue comes from the United States. 

The wireless segment is run exclusively in the U.S. and in the most recent quarter Verizon added a net 2.1 million subscribers. The EBITDA profit margin for the wireless segment is 44.2%.

Company Risks

The two major risks for Verizon are cut-throat competition and the Telecommunications Act of 1996.

The company faces both solidified communications companies and cutting edge start-ups. Most notably, the company’s wireline phone services have to compete with low or zero cost voice-over-internet-providers like Vonage and the MagicJack which plugs into the a computer USB port and only costs about $20 a year.

The Telecommunications Act of 1996 permits competitors to buy Verizon’s services at a discount and resell them in the marketplace. This cuts into Verizon’s profit margins and ability to add subscribers. However, since the act was put into law in 1996 the company’s bottom line has risen tremendously, so you can make the case that the act has only a slight negative effect that hurts every company in the industry equally.

Additionally, Verizon has a unsettlingly low current ratio of .68 and debt-to-equity of .88. The firm clearly uses a lot of debt to aggressively grow earnings, and if they begin to lose market share from stiff competition their high leverage will backfire.

More Information on Verizon

You can visit http://investor.verizon.com/ to read Verizon’s latest quarterly and annual report.

Conclusion

Verizon is not poised to break any earnings growth records in 2009, but the company is competitively positioned with its bundled packages to fight this recession and retain past growth rates when we return to a bull market. I believe that if Benjamin Graham could comment, he would conclude that Verizon is not a value investment at today’s price of $32.47. The company does not meet the 2-1 current ratio requirment, nor is it trading 40% below its 52-week high. But, if you can buy shares between $25-$28 the company becomes much more attractive and you can benefit from a sturdy dividend yield between 6 and 7.5%.

Full disclosure: None.

Benjamin Graham's Value Investing AdviceMacroeconomySecurity Analysis

Benjamin Graham on Market Behavior

In Security Analysis, Benjamin Graham emphasizes the importance of not only focusing on a firm’s potential and accounting statements, but to also pay great attention to the business cycle. Individual investors should research and create their own one year outlook for the market.

Almost any security may be a sound purchase at some real or prospective price and an indicated sale at another price.

– Benjamin Graham, Security Analysis

Think Long-Term

However, Graham also stresses that day-to-day and month-to-month fluctuations of the market should be ignored. Instead, investors should focus on the major shifts in market sentiment and estimating what stage of the business cylce we are in. Clearly today we are in a brutal bear market that has brought down the S&P 500 over 40% year to date. But we have to ask ourselves, what inning of this bear market are we in? Where do we see the strongest values in the market?

Benjamin Graham on Investing in Bear Markets

In a typical case of bear-market hysteria or pessimism the investor would be better off if he were not able to sell out so readily; in fact, he is often better off if he does not even know what changes are taking place in the market price of his securities.

– Benjamin Graham, Security Analysis

Graham’s sentiment on holding onto securities in a bear market could have taken a huge chunk out of someone’s portfolio this year, I know holding onto crashing stocks has severly hurt my portfolio. However at this state of the bear market I believe the above quote is appropriate.

It is ill-advised at this moment in time to liquidate investments into weakness. Your portfolio may depreciate in the coming months, but sometimes you have to take a 3 month deep breath and try your best to not follow your stock prices on a daily basis and just enjoy your dividend yields! To do this you have to be sure that your portfolio is filled with strong, value stocks with years of consistent earnings growth. Ignoring equity prices does not mean you should ignore the latest news from stocks you own. Shares should be sold if there is a fundamental shift in the companies’ long-term outlook.

Even though Warren Buffet’s 2 month-old investment in Goldman Sachs (GS) at $115 a share has fallen almost in half to $65 a share, I’m willing to bet he is sleeping well at night knowing he is invested in a first-in class company (although the investment banking class may be gone forever) and enjoying a 10% dividend yield from his preferred stock.

Don’t Purchase a Stock at Any Price

Finding the strongest values is no easy task, and Benjamin Graham gives some bull market advice that is worth remembering once this cycle changes gears. “Don’t purchase stocks at any price.” He writes that great companies don’t necessarily indicate a great investment if their stock price is comparatively high. Be a patient investor and wait until the company drops to an attractive level. For instance during a bull market in 2006 you could have bought Microsoft (MSFT) at a high of $30.19 or a low of $21.92 (or today at $19.15!) – a 27% variation. If a stock price of a company you have been watching continues to soar far above the intristic value (you can use my post on the Dividend Growth Model to estimate intrinsic value) you give the company, don’t feel like you missed the boat, in the long-term the price very well will come down to levels you like or their earnings will improve to increase your valutation.

When to Invest In Small Cap Stocks

Graham also notes that small cap stocks are more sensitive to swings in the overall market. Your position in small caps should be minimized in your portfolio if you have a weak outlook for the coming year and your small cap positions should be increased in bull markets. This sentiment is supported decades after Graham’s writing, consider comparing SPDR DJ Wilshire Small Cap Growth (DSG) which retreated 49% YTD vs. SPDR DJ Wilshire Large Cap Growth (ELG) which declined only (only!?) 43% YTD.

Beware of Bull Markets

Beware of “bargains” when most stock prices are high. An undervalued, neglected stock may continue to be neglected through the end of the bull market and may potential be one of the hardest hit stocks in the following bear market.

Market Environment, Potential Value, and Intristic Value Produce Market Price

MacroeconomyReal Estate

Real Estate Outlook

After a year where we felt housing prices drop precipitously, the previous decade of strong real estate appreciation seems forgone. The credit crunch has drained the pool of home buyers to mostly families with impressive credit scores and the ability to make large down payments (as it should have been for the past two decades!). 

While the good old days of high returns on real estate investments seems fleeting, today the Wall Street Journal debated the subject with real estate bulls and bears..

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

On the bull side was Kenneth Rosen from the University of California at Berkeley…

People should think of their own homes mainly as places to live, not as investments. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

Although I agree Mr. Rosen has an argument that housing prices may continue to fall a bit in the near term, especially with a remaining 35% real price growth for houses since 1989, houses have always been considered most families biggest investment. For him to propose that homes will no longer be an investment is to propose a major paradigm shift.

Paradigm shifts in the investment world consitently prove fallacious. Recently, consider the dot-com bubble when people believed that the way companies grow profit had changed forever with the advent of the internet. Investors believed that high initial growth in internet companies meant that those firms deserved marketcaps in the hundreds of millions or billions with meager income statements and balance sheets.

I believe in Karl Case’s assessment that housing prices will continue to grow at about a 2.5% to 3% adjusted rate. The latest numbers from the U.S. Department of Housing and Urban Development affirm that we have not hit a real estate bottom – in October 433,000 one-family homes were sold, a 5% drop from the 457,000 homes sold in September of this year (the data is seasonally adjusted).

However, I do believe a housing bottom is due in the next 10 to 24 months. Housing prices have already taken into account much of the return of responsibile lending by banks and when the economic cycle returns to a bull market, unemployment will reverse course, individuals investors portfolios will appreciate and they will be in a considerably better position to purchase homes.

Timothy Geithner
BiographiesMacroeconomy

Who is Timothy Geithner?

Is the 47 year old Timothy Geithner prepared for arguably Barack Obama’s most important appointment? The first decisions made by Mr. Geithner will clearly be crucial to the U.S.’s economic future, as Harvard economist Kenneth Rogoff emphasized, “the decisions that are going to be made in the first 100 days of this administration could have an imprint on the economy for three or four decades.” Man.. I hope Mr. Geithner exceeds expectations if his first decisions will affect the unborn grandchildren of my unborn children.

This article covers Geithner’s resume, including his involvement at the Federal Reserve, participation in recent bailouts as President of the NY Fed and history at the Federal Open Market Committee.

Timothy Geithner’s Resume

I am happy to report that I can at least sleep at night knowing that Geithner’s will need no introduction on Wall Street or in Washington. He has worked for the Treasury Department since 1988, and served directly under Robert Rubin (when he was Secretary) and Larry Summers (when he was Deputy Secretary) from 1999-2001. In the late 1990s he collaborated with Summers on the highly-successful, internationally-funded, $100 billion bailout of Brazil, South Korea, and Thailand; so he has 10+ years of experience for his new post as “Secretary of Baillouts” as the WSJ called it. He was Director of policy development and review department at the IMF, so we can assume he is well versed in the world’s exponential level of globalization and the affect the U.S. currency has on the world. Finally, he has been President of the New York Federal Reserve since 2003 and is Vice-President of the Federal Open Market Committee (FOMC).

President of the New York Federal Reserve

Mr. Geithner role at the epicenter of the Wall Street crisis may raise eyebrows. How prepared the President of the New York Federal is to be Treasury Secretary can be seen in varying lights. At best, it has made him capable of reversing the financial toilet flush in the U.S. with his relationship with the crisis’ players and major events. At worst, he was a Wall Street watchdog who sat on the sidelines while financial institutions took bigger bites of risk than they could handle. Refuting the the latter assessment, Gary Weiss wrote “The Fed, despite its broad financial oversight, does not have authority over investment banks—either to audit their books or lend them money. The day-to-day task of overseeing investment banks falls mainly to the S.E.C.”

What we can judge is the rescue packages the New York Fed was involved in: Bear Stearns and AIG, and he was one of the fingers on the Government’s hand that smacked Lehman Brother’s.

The Bear Stearns negotiations were held in the Fed’s office where he represented New York taxpayers and served as a medium for Bear Stearns and JP Morgan. I’d rather not imagine what would have happened had the big Bear fallen. –  point to him.

Mr. Geithner’s work on the AIG bailouts is a mixed bag. The Wall Street Journal described the original September 16th bailout package as ” rescue medicine (that) was killing the patient.” The WSJ article notes that the bailout would have forced the insurer to sell assets into weakness, pay back the loan with a high interest rate whether they used the money or not, and was drastically undersized. Even on the new AIG bailout plan the government is demanding a 79% equity stake. Do we really want the government to run another financial company after the Fannie Mae and Fredie Mac disaster? – minus one.

Finally, Geithner didn’t extend a hand to Lehman Brothers as it free-falled off the solvency cliff. Lehman’s chapter 11 filling it took over $600 billion of assets down the drain with it. When the Treasury and Fed was handing out money faster than it can be printed, why overlook Lehman Bros? – minus one.

Overall, Mr. Geithner’s scores a negative one, but clearly he believes in responding to the economic crisis with agressive government intervention, which brings a huge wave of confidence to the markets.

FOMCVice President

Timothy Geithner’s experience as VP at the FOMC is welcomed in his new role. The major issue that can be taken with his actions as VP is not being a dissenter in Bernanke’s sluggish reaction time in cutting the federal funds rate . Cramer, take it from here…

In His Own Words…

“What you want to do is design a system that doesn’t prevent people from losing money and making mistakes … because that is inevitable. What you want to do is make sure you run a system where the consequences of those mistakes are less damaging and consequential for the more prudent and for the economy as a whole. And that balance is very hard.”
– Timothy Geithner, July 2008

Conclusion

Mr. Geithner is undoubtedly qualified to be the new Treasury Secretary. He will be a stark contrast to Hank Paulson, he is a lifetime public servant, and has never been a wall street executive.

Larry Summers described Geithner by saying “the ego is disengaged, but he’s very comfortable with himself and very direct—not promoting himself, but just concerned with doing the right thing.”

Geithner faces gargantuan and unparalleled challenges to effectively implement the trillions of the treasury’s bailout dollars effectively and reform government regulations. I hope the WSJ headline for their article on Geithner and Summers –  “Duo Has Proved More Pragmatic Than Ideological” will still be an apt description in the coming years. At least there is comfort in knowing that Timothy Geithner will avoid making the mistakes of Treasury Secretary Andrew Mellon (1921-1932) when he refused to lend money to banks during the Great Depression.

Stock Market Humour

Jim Cramer Says Don’t Worry About Sub-Prime

Sometimes the spontaneity of the market makes me doubt my investment competence. This now ridiculously off the mark clip from Jim Cramer in July 2007 reminds us that we are all only human and we shouldn’t put too much faith into the words of “investment professionals.”

My favorite line has to be “”if every loan in 2006 that was sub-prime blew up – 500 billion, you would still not notice!”

Macroeconomy

Who is Elaine Garzarelli?

Elaine Garzarelli was a Partner and Managing Director at Lehman Brothers prior to starting her own company, Garzarelli Capital Inc. in 1995. Dr. Garzarelli has studied the stock market for over 25 years and was ranked First Team in Quantitative Research in Institutional Investor magazine’s All-Star poll for 11 years; she was also top ranked in Portfolio Strategy and Market Timing. In October 2012, Elaine Garzarelli was inducted into the Institutional Investor All American Research Team Hall of Fame which is a highly coveted prestigious honor.

Elaine currently uses her own self-built econometric mathematical models to predict the direction of the market and then determine the most favored sectors and industries likely to outperform the S&P 500 index. This quantitative methodology allows her to predict the major trends in stock prices and the earnings of over 80 S&P 500 industry groups. Elaine currently uses these mathematical models for stock market timing and sector selection in producing her Sector Analysis weekly reports which she issues to sophisticated investors and institutions.

Elaine Garzarelli is credited with predicting the bear market bottom in the S&P 500 price index in 1982, the top and bottom in 1984, the Crash of 87 and the upturn that followed, and the top and bottom in stock prices in 1990. She warned of overvaluation and problems with “phantom” company profits versus tax return profits as early as 1996, several months before Alan Greenspan’s “irrational exuberance” speech. She was bullish from early 1997 until December 1999. Her indicators showed an overvaluation in the S&P 500 of more than 40 percent in late 1999. In May 2000, her indicators fell to a bear market signal of below 30 percent. Her indicators were bullish at the bear market bottom in late 2002. She turned negative in January, 2008, and had a 100.0 percent hedged position for most of 2008, into early 2009. In March 2009, her indicators turned bullish.

Elaine was featured as a top businessperson in Fortune magazine and was listed in Business Week’s “What’s In” list. In addition, Elaine Garzarelli has been featured in the Wall Street Journal, USA Today, Forbes, the New York Sun, FONDS exclusiv, and other international media. She is a frequent guest on CNBC, Fox Business News and the Nightly Business Report on PBS. For over two decades, Elaine Garzarelli has been a frequent guest speaker at The Money Show throughout the country.

Elaine Garzarelli did her undergraduate and graduate studies at Drexel University where she holds a doctorate in economics and statistics. In 1992, Elaine was inducted by Drexel University into The Drexel 100 which is the University’s alumni hall of fame in which it recognizes a select group of alumni whose lifetime achievements are outstanding. In addition, Elaine has a scholarship fund at Drexel University for female undergraduates students in the Bennett S. Lebow College of Business.